Detroit draws real estate investors worldwide

By Chris ChristoffBloomberg News

Peter Grosso of Long Island, N.Y., paid about $90,000 for 29 Detroit homes at an auction for tax-delinquent properties last October. He's sure they'll sell at a profit within 10 years while he rents them for income.

Grosso is part of a Detroit land rush that has drawn investors from around the U.S. and as far away as England, Cambodia, China and Australia seeking distressed homes for as little as $500. Local buyers — and even a Dutch mink farmer — scooped up hundreds of houses at Wayne County's tax auctions, which last year put a record 21,350 tax-delinquent properties up for sale, 89 percent of them in Detroit, and sold 12,333.

"There's going to be a big turnaround for Detroit, and I want to be part of it," said Grosso, 32, who left a job at Citi Field stadium, home of the New York Mets, after he was injured in a fall while erecting a rooftop sun screen. He said he paid as little as $600 for his Detroit homes and has driven from Long Island several times to check on them.

While private equity firms such as Blackstone Group LP snap up foreclosed homes in California, Arizona and Florida, smaller investors have found bargain-basement bonanzas in Detroit. In a city bedeviled by crime, population loss and fiscal distress, buyers are betting on an urban renaissance like those in Washington, D.C.; the Brooklyn borough of New York City; and Pittsburgh, and property values are rising.

Erstwhile 'armpit'

"A lot of people think of Detroit as the armpit of America, but there are a lot of nice areas in Detroit where there's money to be made," said Nate Heaps, 32, of American Fork, Utah. He bought 290 Detroit properties for $189,600 at the October tax auction, according to Wayne County records.

Private equity firms and smaller investors are buying properties in some of the areas hardest hit by the U.S. housing crash, wagering demand for rentals will rise as banks restrict mortgage availability, putting home-buying out of reach for many. No cities in the U.S. match the Motor City's tax auctions for low prices, Heaps said.

And none come close to the number of tax-foreclosed homes sold, said Alan Mallach, a senior fellow at the Center for Community Progress, a Washington-based advocate for land reuse and neighborhood revitalization.

Cities sell tax-delinquent properties to recoup money owed them for the maintenance of public buildings, salaries of police officers and firefighters, and support of schools. Tax sales often are sparked when banks seize properties in a foreclosure and neglect to pay city levies. There were 945 bank repossessions in Detroit during November, according to RealtyTrac in Irvine, Calif., down from 1,060 a year earlier.

Foreclosure crisis

Detroit led the nation into the foreclosure crisis as the automobile industry declined and people left the city. In April, it narrowly averted state takeover due to its budget deficit and $12 billion in long-term debt, and the city is now under the watch of an advisory board as part of an agreement with the state to prevent it from seeking bankruptcy.

It's a bad sign that so many homeowners don't pay taxes and walk away from properties that are then sold at rock-bottom prices, Mallach said.

"It is a fundamental statement about a lack of confidence in the future of your city and neighborhood," he said.

Empty city

More than 6,500 Wayne County parcels were auctioned in 2011, and 20,000 are expected for sale this year, said David Szymanski, the county's chief deputy treasurer.

Roughly one-quarter of Detroit's housing units are vacant, according to Detroit Future City, a 50-year blueprint for the city's recovery. Mallach worked on the plan, initiated by Mayor Dave Bing to redesign Detroit's 139 square miles — larger than San Francisco, Boston and Manhattan combined — for a shrinking population. It envisions such strategies as turning sparsely populated swaths into green space and farms.

About 150,000 of Detroit's 385,390 lots are vacant or have unused buildings, Mallach said. About 66,000 parcels are publicly owned, and that number grows as unsold homes from tax auctions revert to the city or state.

Detroit Future City assumes the population will bottom out at about 615,000. It has fallen 25 percent since 2000 to 713,000 in the 2010 U.S. census.

Highest unemployment

In November, the Detroit-Livonia-Dearborn area registered an 11 percent jobless rate, not allowing for seasonal adjustments, according to the U.S. Bureau of Labor Statistics. It was the highest among the nation's urban employment centers; the national rate was 7.4 percent.

The U.S. Bureau of the Census reported that from 2007 to 2011, 36.2 percent of Detroit residents lived below the poverty level, compared with a national average of 14.3 percent.

Still, Detroit and its suburbs are the home of the U.S. auto industry, Motown music and four professional sports teams. That might explain why overseas investors are buying, Mallach said.

"Other cities have cheap properties, but if you're in Hungary and you have a little money to invest, you've heard of Detroit," he said.

Some local buyers say tax-delinquent properties are an opportunity to revive Detroit neighborhoods.

Sameer Beydoun, 33, left a New York City real-estate career in 2009 to move back to his hometown of Dearborn and buy, fix and rent homes in nearby Detroit. His Metro Property Group was the single largest buyer in county auctions the past two years, snapping up more than 1,000 properties for about $5 million.

Beydoun recounted, as a New York agent, selling a two-bedroom condo in Queens to a Saudi Arabian physician who paid $800,000 in cash.

"I thought, what could you do with $800,000 in Detroit?" said Beydoun, who majored in business and played football at the University of Toledo. "That could return $20,000 a month in rent."

He and two partners who are childhood friends target Detroit areas where homes are most likely to grow in value and stabilize neighborhoods. Their monthly rents average $850, and almost all homes get new furnaces, plumbing and electrical improvements, Beydoun said during a tour of his properties, some with construction crews busy at work.

Values rising

A neighborhood office on Detroit's west side has a drive-in window for tenants to pay rent. Beydoun said home values are growing faster than expected.

"The rise of Detroit will be in the history books, and we're just proud to be part of it," he said.

Not including tax sales, Detroit home prices in November were up 3.4 percent from a year earlier, compared with an 8.6 percent rise for the metro area, according to FNC Inc., a mortgage data firm based in Oxford, Miss. That compares with an average 4.8 percent increase among 30 U.S. metropolitan areas during the same period.

In Michigan, single-family home prices rose 8.3 percent in the 12 months through November, the eighth-largest state increase in the country, according to CoreLogic Inc., a real estate data provider.

The November median sales price in the city of Detroit was $35,000, down from $80,000 in 2005, according to the FNC analysis.

Wayne County properties that are three years behind in taxes can be auctioned to recoup the debt. The county sold 10,461 of the 18,897 Detroit properties offered last year.

Unsold properties go to the city's or state's land banks, or they can be held and offered at a later auction.

The 2011 and 2012 auctions netted nearly $76 million in back taxes and fees.

California shoes

Jasmine McMorris bought 332 Detroit homes at the county auctions during those years, paying an average of $2,500, and selling some of them to investors. The Detroit native said she wants to help the city by fixing up homes and renting or reselling them to those who otherwise couldn't afford their own.

She hopes to become rich, too.

"Detroit is the hottest thing happening. You can't go to California and get a pair of shoes for what you can get a house in Detroit," said McMorris, whose clients include Long Islander Grosso and investors from Cambodia, Australia and England.

"No place else can I buy a house for $1,000 and put in $3,000 to fix it up and get a 40 percent return on my investment monthly."

McMorris said it takes knowledge of the city to know which neighborhoods will turn profits.

"My goal is, I want to see the city come back," she said in a telephone interview. "I don't know how long it will take, I don't know if I'm dreaming, but I want to see these neighborhoods come back."

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